QUETTA, Pakistan - Pakistan President Pervez Musharraf, facing an impeachment
move from the ruling coalition, may use the country's deteriorating economic
position an excuse to dissolve the elected assemblies, using his power under
constitutional provisions. The worsening law and order situation may also be
used as a charge sheet against the government, according to local analysts.

Musharraf has already criticized the government, led by Prime Minister Yousuf
Raza Gilani, for soaring inflation, the weakening of the rupee against the US
dollar, rapid erosion of foreign exchange reserves, falling stock markets,
dwindling foreign

investment and a worsening law and order situation.

Musharraf's political loyalists have also attacked the ruling coalition for its
failure to provide any relief to the poor masses reeling under rising
inflation, food shortages and frequent electricity blackouts. The government,
in turn, pins the blame for the economic mess on the shoulders of the
government of former prime minister Shaukat Aziz and Musharraf, who ruled the
country for the past eight years.

Pakistan's economy is burdened by a widening trade deficit, rising inflation
with soaring oil and food prices, and energy shortages. The trade gap in the
year to June increased 52.95%, or US$7.18 billion, from $11.14 billion in the
fiscal year 2006-07. In June, the trade gap widened to $1.97 billion, up by
1.76% from a trade shortfall of $1.94 billion recorded a month earlier. Imports
rose 3.64% from a month earlier to $4.02 billion, a 44% gain on the year-ago
period, while exports increased by 5.51% from May, and 33% from June 2007, to
$2.05 billion.

Inflows of investment from overseas, which helped the former government meet
the country's foreign exchange demand in recent years, are now declining,
making it extremely difficult for the new economic managers to cover the severe
trade deficit.

Six increases in oil prices over the past few months have helped to push prices
of essential food items to an unprecedented level, hurting in particular
low-income groups. The government, in seeming indifference to the plight of the
country's poor, has so far taken no effective steps to control inflation.

The coalition government led by the Pakistan People's Party (PPP) is gradually
withdrawing subsidies on gas, electricity and petroleum, adding to inflationary
pressure. That is after the PPP, the party of former premier Benazir Bhutto,
who was assassinated last December, had sought votes in the February 18
election on a slogan of providing food, clothing and houses to the poor.

The government has still not ensured the provision of subsidized flour, pulses,
meat and ghee to the poor nor announced any subsidy on essential food items.
Analysts warn that rising food prices can undermine gains from poverty
reduction and human development that the country has achieved over the past
five years as households struggling to meet the minimum standards of living
might have to cut spending on health and children's education.

In June, the prices of food and beverages rose by 32.05% from a year earlier;
house rent by 12.39%; fuel and lighting by 11.38%; transport and communications
by 24.91% ; clearing laundry and personnel appearances by 17.74% and medicare
by 14.16%, according to the Federal Bureau of Statistics (FBS). Last month
witnessed the highest-ever increase in oil prices, which helped to drive up the
retail price of every commodity.

According to the FBS, inflation measured by the Sensitive Price Index rose to
an all-time high of 32.22% during the week ended July 25 over the corresponding
week last year.

Increased demand for US dollars from oil importers and dealers has put the
Pakistani rupee under pressure. Its value has dipped to a record low of 72 to
the US dollar in the open market and local dealers believe it will remain under
pressure in the coming days.

The country's central bank, meanwhile, is pursuing an aggressively tight
monetary policy to curb import demand. The central bank has supported the rupee
in an attempt to ensure exchange rate stability. The main measure it has taken
is a temporary suspension of forward booking of foreign currency for all
imports, removing the simplest way for importers to hedge against a weakening
rupee. The bank has also made sweeping changes in foreign exchange regulations
to protect the rupee against the US dollar by suspending forward cover
facilities against imports and reducing advances.

Pakistan's foreign currency reserves, which stood at $14.08 billion on February
15, have dropped by more than $6 billion in the past eight months, falling
below $11 billion on July 12. The rapid depletion of reserves is disturbing for
the government as it increased external debt to $46 billion. The country's
foreign debt has swelled by $10.5 billion in the past six years to the current
$45.9 billion.

Last month, Pakistan stock markets witnessed a flight of $150 million in
portfolio investment, highlighting investors' lack of confidence in the market,
particularly due to continuing political uncertainty, local analysts say.

Investors have been reluctant to make fresh initiatives even at the
attractively lower rates owing to prevailing political uncertainty, the law and
order situation and security risks. Some analysts believe that the high
economic growth of 7% achieved under the government of former prime minister
Shaukat Aziz was the real key for attracting foreign as well as domestic
investors during the past five years. The present government has fixed a growth
target of 5.5% for the current fiscal year.

The financial year to June 30 closed with the benchmark KSE-100 index at 12,289
points and market capitalization at $55.3 billion, 17% down from $66.5 million
a year earlier. According to the country's central bank, total outflow of
foreign portfolio investments was $221 million as of June 27, 2008, as against
net inflows of $978 million the previous year. The inflow of foreign funds
stood at $39.8 million during the first half of fiscal year 2008.

The stock markets have recorded an average annual return of 48% in the five
years to 2007. That trend has been reversed in the past few months, with the
KSE 100 share index tumbling 30% in the three months from April 18 and losing
1,312 billion rupees in market capital.

Some analysts blame the present coalition government for not focusing on the
economy and being distracted by resolving other issues, such as that of judges
deposed by Musharraf before it took office. The impeachment move by the ruling
coalition has now created an open fight between the presidency and parliament.
The political uncertainty looks certain to further drive down the markets and
increasingly erode investors' fragile confidence.

Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including
The Economic Development of Balochistan, published in May 2004.